SAM ALTMAN IS THE thirty-two-year-old president of Y Combinator and the world’s most famous startup accelerator. Altman is a unique personality, noting about himself, “The missing circuit in my brain, the circuit that would make me care what people think about me, is a real gift. Most people want to be accepted, so they won’t take risks that could make them look crazy—which actually makes them wildly miscalculate risk.” A New Yorker profile of Altman pointed out, “Like everyone in Silicon Valley, Altman professes to want to save the world; unlike almost everyone there, he has a plan to do it.” Altman was a cofounder and CEO of Loopt, funded by Y Combinator in 2005, and he has personal investments in businesses like Reddit. Because Y Combinator has played such an important role in the achievements of so many successful startups, Altman has unique insights to share.
1. “The best companies are almost always mission oriented.”
Eventually, the company needs to evolve to become a mission to which everyone, but especially the founders, is exceptionally dedicated. The “missionaries versus mercenaries” sound bite is overused but true.
If the founders of a startup are not passionate about solving a significant customer problem they care deeply about, the odds are small that they will be able to successfully create a business that is a grand slam. Creating a scalable, repeatable, and defensible business of this magnitude is a rare event. Venture capitalists love founders with a passion, because missionaries work harder and endure in situations where mercenaries often quit and because missionaries are less likely to sell their businesses too early.
2. “In general, it’s best if you’re building something that you need. You’ll understand it better than if you have to understand it by talking to a customer.”
Passion and a mission are more likely to exist if a business is providing solutions to problems that cause the founders personal pain. In other words, a deep understanding of a valuable customer problem and potential solutions to that problem is enhanced if the founders are themselves potential customers for the solution. Not only is this more efficient and cost-effective, but the founders will be less likely to misunderstand the needs of potential customers who have the problem in question. Yes, it is helpful to have what is referred to in Zen Buddhism as “beginner’s mind” about possible new solutions. No, having deep, relevant domain expertise is not necessarily a handicap.
3. “You want an idea that not many other people are working on, and it is okay if it doesn’t sound big at first.”
The truly good ideas don’t sound like they’re worth stealing. You want to sound crazy, but you want actually to be right.
We are the most successful when we fund things that other people don’t yet think are going to be an immense deal but two years later become a big deal. And it’s really hard to predict that.
A lot of the best ideas seem silly or bad initially—you want an idea at the intersection of “seems like a bad idea” and “is a good idea.”
Both startup founders and venture capitalists are trying to find mispriced business opportunities that are convex. Asset prices fluctuate more than actual financial value, which is what creates the opportunity for investors. The probability of finding and successfully capitalizing on such a mispriced convex opportunity is far greater if the startup is not working on the same problem as many other businesses.
4. “No growth hack, brilliant marketing idea, or sales team can save you long term if you don’t have a sufficiently good product.”
Make something people want. You can screw up most other things if you get this right; if you don’t, nothing else will save you.
All companies that grow really big do so in only one way: People recommend the product or service to other people. What this means is that if you want to be a great company someday, you have to eventually build something so good that people will recommend it to their friends—in fact, so good that they want to be the first one to recommend it to their friends.
Figure out a way to get users at scale (i.e., bite the bullet and learn how sales and marketing work). Incidentally, while it is currently in fashion, spending more than the lifetime value of your users to acquire them is not an acceptable strategy. Obsess about your growth rate, and never stop. The company will build what the CEO measures. If you ever catch yourself saying, “We’re not focused on growth right now,” think very carefully about the possibility you’re focused on the wrong thing. Also, don’t let yourself be deceived by vanity metrics.
In business, there is no substitute for solving a real customer problem with a product that people want to buy. Without a valuable product offering, an overly sales-driven culture will inevitably produce a customer acquisition cost so high it is fatal. With enough sales and marketing spending, almost anything can be sold at some level, but even then, customers will leave. Every aspect of a product has the potential to help make the business grow. Or not. The opportunities to create growth by making product choices are nearly endless since it is simply impossible for a product to be technically neutral. For example, you cannot design a neutral automobile, a neutral building, or neutral software. Choices must be made in creating and offering a product, and those choices can impact growth in either a positive or negative manner. Paul Graham, a cofounder of Y Combinator, points out,
A startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of “exit.” The only essential thing is growth. Everything else we associate with startups follows from growth. To grow rapidly, you need to make something you can sell to a big market.
5. “It is worth some real upfront time to think through the long-term value and the defensibility of the business.”
Have a strategy. Most people don’t. Occasionally take a little bit of time to think about how you’re executing against your strategy.
Every business must find at least some barrier to entry to generate a profit. Without a moat of some kind, competitors will increase the supply of the product offering to a point where the financial return will be equal to the opportunity cost of capital. In other words, without some limit on the supply of alternative products provided by competitors, a business will not earn an economic profit. The Harvard Business School professor Michael Porter points out, “If customers have all the power, and if the rivalry is based on price, you won’t be very profitable.” Moats can take many forms and have a range of contributing elements, but they must continually be refreshed since they are always under attack by competitors.
6. “Every company has a rocky beginning.”
You have to have an almost crazy level of dedication to your company to succeed.
The process of creating and managing a business, most notably a startup, will never go completely according to plan. There is no manual to follow to create business success. There are no foolproof recipes or formulas. Courage, perseverance, dedication, determination, and grit will inevitably be needed to produce positive outcomes. Dr. Angela Duckworth defines grit as “perseverance and passion for long-term goals.” People with grit, determination, resourcefulness, and the ability to evolve do not give up easily. The irony is that the more you focus on mission over money, the higher the odds of your being financially successful.
7. “If you’re not an optimist, you make a very bad venture capitalist.”
Great entrepreneurs and venture capitalists are typically optimistic, even though most of what they do results in financial failure as measured by frequency of success. Maintaining an optimistic attitude in the face of uncertainty and repeated failure is a challenge. This reminds me of a joke: An optimistic entrepreneur and a pessimistic entrepreneur are sitting in a café talking. The pessimist turns to the optimist and says, “Things can’t possibly get worse.” The optimist replies, “Sure, they can!”
8. “Great execution is at least ten times more important and one hundred times harder than a good idea.”
Remember that you are more likely to die because you execute badly than get crushed by a competitor.
Delighting customers with magic moments is critical to creating a successful business. These magic moments are sometimes referred to as “aha” moments. A business’s objective in creating magic moments is to create in its customers an emotional affinity with the product. “Delight” and “love” are strong words, but they are the right words. Andy Rachleff points to Netflix as an example of a company that is totally focused on delighting its customers instead of being paranoid about competitors. In this way, Netflix is parting ways with the Andy Grove dictum of being paranoid about competitors, instead focusing on delighting customers. Rachleff quotes Reed Hastings, the Netflix CEO, as saying, “Being paranoid about competition is the last thing you want to do because it distracts you from the primary job at hand: delighting the customer.”
9. “Stay focused, and don’t try to do too many things at once.”
Eliminate distractions.
The hard part of running a business is that there are a hundred things that you could be doing, and only five of those matter, and only one of them matters more than all of the rest of them combined. So figuring out there is a critical path thing to focus on and ignoring everything else is really important.
Any business, but especially a startup, will face many challenges. There will always be more things that can be done than there are people and resources to do them. Great founders and entrepreneurs know the difference between what could be done and what should be done. Setting priorities and staying focused are critical. Any business must decide what not to do, especially since this is the essence of strategy. Distractions like industry conferences are not a way to add value, especially if the uncompleted tasks are primary ones, such as finding core product value and product–market fit. Before these two tasks are accomplished, almost everything else is a distraction since without them the business is doomed.
10. “At the beginning, you should only hire when you have a desperate need to.”
Later, you should learn to hire fast and scale up the company, but in the early days, the goal should be not to hire.
Hiring is the most important thing you do; spend at least a third of your time on it.
When a business is just getting started and product–market fit has not yet been discovered, small teams are not only more efficient, but they also translate into cash burn rates that can be kept relatively low until key milestones are achieved. Low cash burn rates allow the business more time to build something customers will genuinely be delighted with and even love. If a startup’s cash burn rate is high, the company can find itself under pressure to prematurely commit to an unproven value hypothesis, the result of which is often fatal. Only once product–market fit has been found and the time has come to grow the business does recruiting become a huge priority. Great founders spend far more time recruiting than people imagine, but most notably after the value hypothesis has been proven.
11. “One thing that founders always underestimate is how hard it is to recruit.”
You think you have this great idea that everyone’s going to come join, but that’s not how it works.
A great team and a great market are both critically important—you have to have both. The debate about which is more important is silly.
Don’t let your company be run by a sales guy. But do learn how to sell your product.
Experienced venture capitalists are looking for evidence that founders have strong sales skills. One early test of a these skills is how well a founder performs when making a fundraising pitch. The idea is simple: If the entrepreneur can’t sell the idea to a venture capitalist, how is he or she going to be able to recruit great people, sell the product, and find great distribution? The ability to sell the product to investors, sell the potential of the business to employees, and then to sell the product to customers is core to any business. Altman is saying that sales are only one part of what is needed for success, and it should not be the dominant activity.
12. “Keep an eye on cash in the bank and don’t run out of it.”
Do reference checks on your potential investors. Ask other founders how they are when everything goes wrong.
Good investors are worth a reasonable premium. Go for a few highly involved investors over a lot of lightly engaged ones.
If the founders have a very good idea for a business, have a strong team, and have targeted an attractive market, money will not be the scarcest ingredient in creating a successful business. What will be scarce is value-added capital (investors who can genuinely supply the business with more than money). Even scarcer is value-added capital that will be a big help when things are going wrong. The last thing founders need are fair-weather investors. Taking the time necessary to research potential investors is wise since the relationship between founder and investor will last for many years.